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Did Sears get gouged by its own CEO?

Yesterday Sears (SHLD) announced that it would borrow up to $400 million from groups affiliated with CEO and Chairman Eddie Lampert's ESL Investments Inc. The filing is pretty densely worded but there are multiple listed lenders in the documents. As it turns out they all are under the sole control of Eddie Lampert.

On the surface it's a good transaction all around. Generous, even. Lampert's affiliates are charging an annual rate of 5% plus 1.75% up front. The loan ends on December 31st but Sears can extend it for another 0.5%. In return for what figures to be around $10 million Sears gets to buy Christmas inventory, thus avoiding the dreaded Retail Liquidity Death Spiral.

Eddie Lampert

Eddie Lampert is brilliant and rich. He didn't get that way giving out sub-market rate loans to retailers burning through a billion a year in cash. There had to be a kicker in this package somewhere and it's a beauty.

As collateral Sears is giving ESL (i.e., lenders controlled by its Chairman and CEO) first priority liens on 25 locations. According to the 8K filing those locations are pretty much whatever stores Lampert and his affiliates (possibly a dog or hand-puppet for all their say in the matter) 25 stores!

That values the stores at $16 million apiece for the purposes of this loan. In reality Sears has been selling properties for anywhere between $20 and $50 million for the last few years. The company's balance sheet list real estate assets of $5 billion. Bulls say the company's 400 most valuable stores are worth at least $18 million a piece and the company has been selling locations for much more than that over the last year.

This isn't illegal or perhaps evil but it's certainly opportunistic. In exchange for giving Sears the right to live through Christmas, Lampert will collect either $10 million in interest or his pick of 25 stores that could easily be worth more than half a billion. If this were the movie It's a Wonderful Life Lampert would be playing both George Baily and Mr. Potter the evil banker.

Just another weird and deeply sad turn for a company that was once the best of Amazon (AMZN) and Walmart (WMT) rolled into one.